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Cautious but short-sighted: Inflation and mortgage strategy in low-income households

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  • Ilan, Mordechai
  • Mugerman, Yevgeny

Abstract

We study mortgage choices among low-socioeconomic-status (SES) borrowers, focusing on payment-to-income (PTI), loan-to-value (LTV), and inflation indexation decisions. Contrary to expectations of tighter financial constraints, low-SES households adopt a cautious stance at origination, selecting lower PTI and LTV ratios than higher-SES borrowers. Yet this short-term prudence proves short-sighted: many mistime their decision to link repayments to the consumer price index (CPI), exposing themselves to wage–price gaps where indexed payments outpace income growth. Using a simulation-based sensitivity analysis, we show that the probability of rising PTI over the life of the loan is systematically higher for low-SES households, especially when mortgages are originated in periods of elevated inflation expectations. These findings highlight the long-run repayment risks faced by vulnerable borrowers and underscore the importance of targeted financial education and advisory tools to improve mortgage decisions.

Suggested Citation

  • Ilan, Mordechai & Mugerman, Yevgeny, 2025. "Cautious but short-sighted: Inflation and mortgage strategy in low-income households," Finance Research Letters, Elsevier, vol. 86(PA).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pa:s1544612325016083
    DOI: 10.1016/j.frl.2025.108354
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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